Project Estimation: more science than fiction

Estimation or the ability to accurately predict actual project time, costs, risks and realisation of financial benefits within a data range has wide-ranging importance. For successful organisations, reliable benchmarking and informed programme and project estimation based on historical data for people resources, funding, assets, materials and/or services is an essential component of the effort required to create and sustain value in any organisation, in any industry or sector.

At this point, let’s define project benchmarking as the continuous, systematic search for and implementation of project portfolio management best practices, which leads to superior performance.

Sponsoring organisations and accountable officers rely on reference class forecasting to drive performance improvements that forms the basis for communicating with stakeholders the actual outcomes that enables benefits realisation in practice. They recognise that without reliable reference class forecasting at the heart of their portfolio management process, information that supports business case options analysis, investment appraisal and portfolio prioritisation would be mired in optimism bias and key opportunities and risks about successful delivery are likely to be missed. Keeping projects on track using empirical data is critical to maximise value for money in organisational capital investment, and to deliver the required services and products that customers need and want.

Despite the demonstrable benefits of reliable reference class forecasting, many organisations continue to struggle with, and even neglect, this business-critical process. Too often, rather than treating benchmarking and reference class forecasting as a core business capability, people see it as a responsibility of the finance function, tied to a timetable with little relevance to the business planning cycle.

The Infrastructure and Projects Authority (IPA) states that early estimate of a project’s Anticipated Final Cost (AFC) in terms of capital, maintenance and support costs for asset management is important in determining both the perceived and actual success of a project. Early estimates are inherently uncertain that may result in the project cost being misrepresented and misunderstood.

This can lead to what Bent Flyvbjerg – a professor at the Saïd Business School of the University of Oxford – calls optimism bias, blank cheque syndrome, conspiracy of continuation and worst, strategic misrepresentation. A curious paradox that exists where increasingly more projects are proposed despite their consistently poor performance against initial forecasts of costs, time, and benefits that determine return on investment. However, Flyvbjerg suggests the first step in reducing project cost overrun is to acknowledge that a substantial risk of overrun exists that cannot be completely eliminated, but it can be efficaciously managed as part of the project risk management process.

Early cost estimates are typically vulnerable to influencing behaviours and optimism bias when allied to the desires of key program and project stakeholders. That is, to ensure an investment proposal secures capital funding when decisions are based solely on desirability factors at the exclusion of viability and achievability. These factors can undermine reliable cost estimation and representation of the risk and uncertainties and so affect delivery of value.

In planning and budgeting, there is a tendency for those presenting projects for approval to sometimes – knowingly or not – understate the full project costs and risks and to overstate the forecast financial benefits. Those who embark on such practices justify it as an expected part of the negotiation ‘game’ and argue that many worthwhile projects would never get approval if the true costs were revealed at the start.  This can be explained by the planning fallacy, a phenomenon in which predictions about how much time and cost will be needed to complete a future task display an optimism bias and underestimate the actual time and cost needed.